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Leaseholder improvements usually involve retail purchases of equipment and supplies, which are subject to sales tax just like any other purchases. Although leasehold improvements typically become the property of the landlord rather than the tenant at the end of a lease period, their value and ownership are not sold, but rather relinquished, usually without compensation. Even if a tenant is eventually able to resell leaseholder improvements, he has made these purchases initially as items to be used rather than resold.

Retail Sales Tax

Sales tax is paid by the end user of a product at the retail level. A wholesaler or contractor who buys materials and resells them in the course of making leasehold upgrades does not, himself, pay tax on these items, but he must charge tax to his customers, then remit these taxes to his state's revenue agency. A tenant paying for leasehold improvements may not pay sales tax on the services the contractor provides if his state does not levy sales tax on services, but he must pay sales tax on physical items such as building materials.

Leasehold Improvement Tax Payments

Lessees making leasehold improvements typically pay sales tax when they make purchases that include these sales tax amounts as part of their total price tag. The retailer who sells the taxable items, such as building materials, is responsible for collecting these taxes and remitting them to the state revenue agency. When a lessee living in a state with a sales tax buys materials in a state such as Oregon, which charges no sales tax, he must pay use tax to his own state's revenue agency for these purchases.

Repairs vs. Improvements

Some states such as New York charge sales tax on contractor services that go toward repairs to a property, but not toward improvements that boost the property's value. A leasehold improvement that involves fixing a broken step or a leaky roof would be taxable in New York, while one that involves building a deck for outdoor seating is not similarly taxed. Regardless of whether they are used for repairs, maintenance or improvements, materials used in leasehold construction upgrades are subject to sales tax.

Rent and Sales Tax

In Florida, commercial rent is subject to a 6 percent sales tax that landlords are allowed to pass along to tenants as of 2014. However, a 2012 state appeals court decision ruled that leasehold improvements made by tenants and figured into rent payments were not subject to this tax when they were not explicitly intended as portions of the rent payments. This ruling specifically addressed sales tax on leasehold improvements in this special situation, applying to tax that would have been collected on the rent that the leasehold improvements replaced. The ruling did not address sales tax charged at the retail level on specific items that were part of the leasehold improvements.

Gartenstein, Devra. (n.d.). Is a Leaseholder Improvement Exempt From Sales Tax? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/leaseholder-improvement-exempt-sales-tax-80952.html